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Barchart
Josh Enomoto

SRE Stock: A Smart Investment as the Market Rotates Away From Risk

As a public utility holding company, Sempra Energy (SRE) might not be the most exciting investment to elect. Indeed, the Barchart Technical Opinion indicator goes the extra step, labeling it a “strong sell” (magnitude 100% in fact), noting that the short-term outlook suggests a continuation of the current bearish trend. However, investors should keep open the possibility of an upswing on the horizon.

Sure, present circumstances don’t look particularly inviting. Since the January opener, SRE stock slipped just over 6%. In contrast, over the same period, the benchmark S&P 500 index moved up more than 15%. Put another way, merely selecting a basket of securities tied to the leading (read relatively boring) companies in the U.S. easily outperforms Sempra.

It’s not exactly the comparison you want to hear as a stock picker. Still, it might be too early to give up on SRE.

With the June jobs report posted last Friday, investors have plenty of market-shifting elements to consider before making significant moves in the equities arena. Primarily, all eyes are on the Federal Reserve and its will-it, won’t-it decision later this month regarding monetary policy adjustments.

For SRE stock, the beauty of the underlying narrative is that whatever the decision and implications – hawkish or dovish – it will be a relevant player. What’s more, rumblings in the derivatives market suggests Sempra may be attracting the smart money.

Options Traders See Opportunity with SRE Stock

Following the close of the July 10 session, Sempra became one of the top highlights in Barchart’s screener for unusual stock options volume. The total volume count hit 3,614 contracts versus an open interest reading of 10,429. Moreover, the delta between the Monday session volume and the trailing one-month average metric came out to 689.08%.

Drilling into the details, call volume hit 3,322 contracts versus put volume of 292. This pairing yielded a put/call volume ratio of 0.09, on paper significantly favoring the bulls. Per Barchart, the put/call open interest ratio comes in at 0.93, which actually leans to the bearish side. Because of the upward bias of the market, the typical delineation between optimism and pessimism is 0.70.

To be fair, historical implied volatility (IV) data from Fintel shows that IV peaked recently at 0.27 on March 13, 2023. Eventually, it fell to a low of 0.16 on June 21. However, since then, IV has been steadily marching higher, implying a shift in the market’s view of the possibility of price changes in SRE stock.

Notably, Sempra’s IV shot up conspicuously on July 6, the date that ADP released its blowout June employment report. The data showed that employers added the most jobs in 16 months, according to Barchart contributor Rich Asplund.

Put another way, the market braced itself for a similarly robust print regarding the official June jobs report. While this particular readout came in lower than economists expected, at 209,000 new employment opportunities added, it was still a resilient result. Unfortunately for the Fed, the labor market has been durable despite rising interest rates.

Naturally, many analysts see the central bank hiking rates again when policymakers meet later this month. If the Fed decides to take the kiddie gloves off with its battle with inflation, the market may shift from a risk-on profile to one that’s decidedly risk off.

In that case, SRE stock may truly shine.

Sempra Benefits From its Natural Monopoly

Fundamentally, Sempra benefits from a key advantage: a natural monopoly. Basically, any enterprise is free to compete with Sempra. However, because the underlying public utility space features massive barriers to entry, would-be rivals don’t even bother. This cynical framework allows the company to grab a piece of the California economic pie uncontested.

To be fair, the Golden State attracts plenty of criticism, from its generally left-leaning political views to its high cost of living. However, the concept of people leaving California for these and myriad other reasons comes with a huge wrinkle: the largest population losses in the state occur among rural counties while people with higher incomes and more education move in.

If anything, Sempra has a brighter future than doom-and-gloom conspiracy theorists proclaim because while California may be experiencing a net migration loss, on a per-capita income basis, the state is attracting the cream of the crop from other regions.

And the best part? No matter what happens to the economy or whatever the Fed decides to do with monetary policy, people must pay their utility bills. As a core expenditure, utilities represent the last items of a personal budget that would be axed. Therefore, SRE stock is a very smart play ahead of market uncertainty.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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